Orion Properties Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. Orion Office REIT Inc. (the “Company”, “Orion”, “we”, or “us”) makes statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this report entitled “ Forward-Looking Statements ”. Certain risks may cause our actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a complete discussion of such risk factors, see the section in this report entitled “ Risk Factors ”. Overview Orion is an internally managed REIT engaged in the ownership, acquisition, and management of a diversified portfolio of mission-critical regional and corporate headquarters office buildings located in high quality suburban markets across the U.S. and leased primarily on a single-tenant net lease basis to creditworthy tenants. Orion Office REIT Inc. was incorporated in the State of Maryland on July 1, 2021 and intends to qualify and elect to be taxed as a REIT for U.S. federal income tax purposes, commencing with our initial taxable year ending December 31, 2021. The Company has 92 office properties with an aggregate of 10.5 million square feet located in 29 states and Puerto Rico, with an occupancy rate of 91.8% and a weighted-average remaining lease term of 4.0 years as of December 31, 2021. Including the Company’s pro rata share of square feet and annualized base rent from the Company’s unconsolidated joint venture with an affiliate of Arch Street Capital Partners, we owned an aggregate of 10.6 million square feet with an occupancy rate of 91.9% and a weighted-average remaining lease term of 4.1 years as of December 31, 2021. Merger with Realty Income On April 29, 2021, Realty Income entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”) with VEREIT, Inc. (“VEREIT”), its operating partnership, VEREIT Operating Partnership, L.P. (“VEREIT OP”), Rams MD Subsidiary I, Inc., a wholly owned subsidiary of Realty Income (“Merger Sub 1”), and Rams Acquisition Sub II, LLC, a wholly owned subsidiary of Realty Income (“Merger Sub 2”). On November 1, 2021, pursuant to the Merger Agreement, Merger Sub 2 merged with and into VEREIT OP, with VEREIT OP continuing as the surviving partnership, and immediately thereafter, VEREIT merged with and into Merger Sub 1, with Merger Sub 1 continuing as the surviving corporation (together, the “Mergers”, and such effective time of the Mergers, the “Merger Effective Time”). Upon the Merger Effective Time, as part of the Mergers, Realty Income acquired certain office real properties and related assets previously owned by subsidiaries of VEREIT (collectively, “VEREIT Office Assets”). Following the Merger Effective Time, in accordance with the Merger Agreement, Realty Income contributed the portion of the combined business comprising certain office real properties and related assets previously owned by subsidiaries of Realty Income (collectively, “Realty Income Office Assets”) and the VEREIT Office Assets (the “Separation”) to the Company and its operating partnership, Orion Office REIT LP (“Orion OP”). On November 12, 2021, following the Separation, in accordance with the Merger Agreement and that certain Separation and Distribution Agreement, Realty Income effected a special distribution to its stockholders (including the former holders of VEREIT common stock and certain former VEREIT OP common unitholders prior to the Mergers) of all of the outstanding shares of common stock of the Company (the “Distribution”). Following the Distribution, we became an independent publicly traded company and intend to qualify and elect to be taxed as a REIT, commencing with our initial taxable year ending December 31, 2021. On November 12, 2021, in connection with the Distribution, Orion OP also entered into an Amended and Restated Limited Liability Company Agreement (the “LLCA”) of OAP/VER Venture, LLC (the “Arch Street Joint Venture”), by and between Orion OP and OAP Holdings LLC (the “Arch Street Partner”), an affiliate of Arch Street Capital Partners, pursuant to which the Arch Street Partner consented to the transfer of the equity interests of the Arch Street Joint Venture previously held by VEREIT Real Estate, L.P. to Orion OP. Our common stock, par value $0.001 per share, trades on the NYSE under the symbol “ONL”. Through November 12, 2021, we had not conducted any business as a separate company other than start-up related activities. Emerging Growth Company Status We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). As such, we are eligible to take advantage of certain exemptions from various reporting requirements that apply to other public companies that are not emerging growth companies, including, but not limited to, compliance with the auditor attestation 30 requirements of Section 404 of the Sarbanes-Oxley Act and the requirements to hold a non-binding advisory vote on executive compensation and any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we will rely on the exemptions available to us as an emerging growth company. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. In addition, Section 107 of the JOBS Act provides that an emerging growth company may take advantage of the extended transition period provided in Section 13(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period and, therefore, will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies until we can no longer avail ourselves of the exemptions applicable to emerging growth companies or until we affirmatively and irrevocably opt out of the extended transition period. We will remain an emerging growth company until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (ii) the last day of the fiscal year following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act, (iii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur on the last day of the fiscal year in which the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iv) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period. Basis of Presentation The Company’s consolidated and combined financial statements include the accounts of the Realty Income Office Assets presented on a combined basis for the period from January 1, 2021 to October 31, 2021 and all prior periods presented as the ownership interests were under common control and ownership of Realty Income during the respective periods. From and after the Merger Effective Time, the consolidated and combined financial statements of the Company include the accounts of the Company and its consolidated subsidiaries and a consolidated joint venture. The historical combined and consolidated financial results for the VEREIT Office Assets include the accounts of the VEREIT Office Assets on a combined basis as the ownership interests were under common control and ownership of VEREIT. These combined financial results were derived from the books and records of and carved out from VEREIT. The combined and consolidated financial statements of the VEREIT Office Assets reflect charges for certain corporate costs and, we believe such charges are reasonable. Costs of the services that were charged to the VEREIT Office Assets were based on either actual costs incurred by each business or a proportion of costs estimated to be applicable to each business, based on VEREIT Office Assets’ pro-rata share of annualized base rent. The historical combined financial information presented does not necessarily include all of the expenses that would have been incurred had VEREIT Office Assets been operating as a separate, standalone company. Such historical combined and consolidated financial information may not be indicative of the results of operations, financial position or cash flows that would have been obtained if the VEREIT Office Assets had been an independent, standalone public company during the periods presented or of the future performance of the Company as an independent, standalone company. Election as a REIT We intend to qualify and elect to be taxed as a REIT for U.S. federal income tax purposes under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with the taxable year ended December 31, 2021. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute annually at least 90% of our REIT taxable income, subject to certain adjustments and excluding any net capital gain, to stockholders. As a REIT, except as discussed below, we generally will not be subject to federal income tax on taxable income that we distribute to our stockholders so long as we distribute at least 90% of our annual taxable income (computed without regard to the deduction for dividends paid and excluding net capital gains). REITs are subject to a number of other organizational and operational requirements. Even if we maintain our qualification for taxation as a REIT, we may become subject to certain state and local taxes on our income and property, federal income taxes on certain income and excise taxes on our undistributed income. We believe we are organized and operating in such a manner as to qualify to be taxed as a REIT for the taxable year ending December 31, 2021. 31 ORION OFFICE REIT INC. Critical Accounting Policies and Significant Accounting Estimates Our accounting policies have been established to conform with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Management believes that we have made these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition. We continually test and evaluate these estimates and assumptions using our historical knowledge of the business, as well as other factors, to ensure that they are reasonable for reporting purposes. However, actual results may differ from these estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that different accounting estimates would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different assumptions or estimates that may impact comparability of our results of operations to those of companies in similar businesses. We believe the following critical accounting policy involves significant judgments and estimates used in the preparation of our financial statements, which should be read in conjunction with the more complete discussion of our accounting policies and procedures included in Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements. Real Estate Impairment We invest in real estate assets and subsequently monitor those investments quarterly for impairment. The risks and uncertainties involved in applying the principles related to real estate impairment include, but are not limited to, the following: • The review of impairment indicators and subsequent determination of the undiscounted future cash flows could require us to reduce the value of assets and recognize an impairment loss. • The evaluation of real estate assets for potential impairment requires our management to exercise significant judgment and make certain key assumptions. There are inherent uncertainties in making these estimates such as market conditions and performance and sustainability of our tenants. • Changes related to management’s intent to sell or lease the real estate assets used to develop the forecasted cash flows may have a material impact on our financial results. Recently Issued Accounting Pronouncements Recently issued accounting pronouncements are described in Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements. 32 Operating Highlights and Key Performance Indicators 2021 Activity Operations • Consummated the Mergers on November 1, 2021, and completed the Separation and the Distribution on November 12, 2021. • Acquired interest in one property through our unconsolidated joint venture for a purchase price of $30.5 million, for which the Company’s investment and ownership percentage is 20%. Debt • On November 12, 2021, entered into a credit agreement providing for a three-year, $425.0 million senior revolving credit facility (the “Revolving Facility”) and a two-year, $175.0 million senior term loan facility (the “Term Loan Facility”). Also, on November 12, 2021, the Company entered into a 6-month, $355.0 million senior bridge term loan facility (the “Bridge Facility” and collectively with the Revolving Facility and Term Loan Facility, the “Facilities”). The Bridge Facility was subsequently refinanced with a $355.0 million mortgage loan during February 2022. • On November 12, 2021, borrowed $90.0 million under the Revolving Facility, and each of the Term Loan Facility and the Bridge Facility were fully drawn. Approximately $595.0 million of the net proceeds of the Facilities was distributed to Realty Income in accordance with the Separation and Distribution Agreement. • As of December 31, 2021, the Company had $335.0 million of borrowing capacity under the Revolving Facility. • Entered into interest rate swap agreements with an aggregate notional amount of $175.0 million in order to hedge interest rate volatility with respect to the Company’s borrowings under the Term Loan Facility. Equity • Issued 56,525,650 shares of common stock to Realty Income, such that Realty Income owned 56,625,650 shares of the Company’s common stock and effected the Distribution of such shares to its stockholders on November 12, 2021. • Granted certain affiliates of the Arch Street Partner warrants to purchase up to 1,120,000 shares of the Company’s common stock (the “Arch Street Warrants”). Real Estate Portfolio Metrics Our financial performance is impacted by the timing of acquisitions and dispositions and the operating performance of our operating properties. The following table shows the property statistics of our operating properties, including our pro rata share of the applicable statistics of the properties owned by our unconsolidated joint venture as of December 31, 2021: 2021 Portfolio Metrics Operating properties 92 Unconsolidated joint venture properties 6 Rentable square feet (in thousands) (1) 10,646 Occupancy rate (2) 91.9% Investment-grade tenants (3) 67.7% Weighted-average lease term (in years) 4.1 ____________________________________ (1) Leasable square feet of operating properties and the Company’s pro rata share of leasable square feet of properties owned by the unconsolidated joint venture. (2) Occupancy rate equals the sum of leased square feet divided by rentable square feet. (3) Based on annualized base rental income of our real estate portfolio, including the Company’s pro rata share of annualized base rent for properties owned by the unconsolidated joint venture, as of December 31, 2021. Investment-grade tenants are those with a credit rating of BBB- or higher by Standard & Poor’s Financial Services LLC or a credit rating of Baa3 or higher by Moody’s Investor Service, Inc. The ratings may reflect those assigned by Standard & Poor’s Financial Services LLC or Moody’s Investor Service, Inc. to the lease guarantor or the parent company, as applicable. 33 Operating Performance In addition, management uses the following financial metrics to assess our operating performance (dollar amounts in thousands, except per share amounts). Year Ended December 31, 2021 Financial Metrics Total revenues $ 79,731 Net (loss) income $ (47,464) Basic and diluted net (loss) income per share attributable to common stockholders $ (0.84) FFO attributable to common stockholders (1) $ 46,689 FFO attributable to common stockholders per diluted share (1) $ 0.82 Core FFO attributable to common stockholders (1) $ 58,380 Core FFO attributable to common stockholders per diluted share (1) $ 1.03 ____________________________________ (1) See the Non-GAAP Measures section below for descriptions of our non-GAAP measures and reconciliations to the most comparable U.S. GAAP measure. Future Lease Expirations The following is a summary of lease expirations for the next 10 years and beyond at the operating properties we owned as of December 31, 2021, including our pro rata share of properties owned by our unconsolidated joint venture (dollar amounts and square feet in thousands): Year of Expiration Number of Leases Expiring (1) Square Feet Square Feet as a % of Total Portfolio Annualized Base Rent Expiring Annualized Base Rent Expiring as a % of Total Portfolio 2022 14 1,168 11.0 % 21,923 12.2 % 2023 22 2,156 20.3 % 32,564 18.1 % 2024 18 2,029 19.1 % 40,024 22.3 % 2025 11 1,046 9.8 % 18,344 10.2 % 2026 12 741 7.0 % 16,222 9.0 % 2027 11 884 8.3 % 14,883 8.3 % 2028 8 348 3.3 % 6,961 3.9 % 2029 3 392 3.7 % 5,659 3.1 % 2030 2 98 0.9 % 4,468 2.5 % 2031 1 11 0.1 % 399 0.2 % Thereafter 8 847 7.8 % 17,825 9.9 % Total 110 9,720 91.3 % $ 179,272 99.7 % _______________________________________________ (1) The Company has certain properties that are subject to multiple leases. Results of Operations The results of operations discussed in this section include the accounts of Realty Income Office Assets from January 1, 2021 to October 31, 2021 and all prior periods presented and the accounts of the Company and its consolidated subsidiaries from and after the Merger Effective Time. For the periods presented prior to the date of the Distribution, our historical consolidated and combined financial results reflect charges for certain legal, accounting and other costs related to the Distribution, which were incurred and paid by Realty Income on our behalf, and are reflected as capital contributions. 34 Comparison of the year ended December 31, 2021 to the year ended December 31, 2020 (dollars in thousands) The Company’s portfolio size significantly increased in the last two months of 2021 as a result of the Mergers, which contributed to an increase in revenues and expenses when comparing the year ended December 31, 2021 to the same period in 2020. At December 31, 2021, we had 92 office properties with an aggregate of 10.5 million square feet as compared to 40 properties with approximately 3.0 million leasable square feet at December 31, 2020. Revenues The table below sets forth, for the periods presented, revenue information and the dollar amount change year over year (in thousands): Year Ended December 31, 2021 2020 2021 vs 2020 Increase/(Decrease) Rental $ 79,460 $ 53,474 $ 25,986 Fee income from unconsolidated joint venture 271 — 271 Total revenues $ 79,731 $ 53,474 $ 26,257 Rental The increase in rental revenue of $26.0 million during the year ended December 31, 2021 as compared to the same period in 2020 was primarily due to the increase in our overall portfolio size resulting from the closing of the Merger. Fee income from unconsolidated joint venture Fee income from unconsolidated joint venture consists of fees earned for providing various services to the Company’s unconsolidated joint venture. The increase of $0.3 million during the year ended December 31, 2021 as compared to the same period in 2020 was primarily due to fees earned from the Arch Street Joint Venture, including $0.2 million of acquisition fees for the purchase of one property in the partnership in December 2021. Operating Expenses The table below sets forth, for the periods presented, certain operating expense information and the dollar amount change year over year (in thousands): Year Ended December 31, 2021 2020 2021 vs 2020 Increase/(Decrease) Transaction costs 7,909 — 7,909 Property operating 13,411 5,770 7,641 General and administrative 3,832 2,051 1,781 Depreciation and amortization 43,922 25,950 17,972 Impairments 49,859 18,671 31,188 Total operating expenses $ 118,933 $ 52,442 $ 66,491 Transaction Costs During the year ended December 31, 2021, the Company incurred $7.9 million of transaction costs, which primarily consist of integration costs, and attorney fees and accountant fees related to the Mergers and the Distribution. The integration costs consist of expenses related to the fair value of the warrants issued to affiliates of the Arch Street Partner as well as appraisal fees. No such costs were incurred during the same period in 2020. Property Operating Expenses Property operating expenses such as taxes, insurance, ground rent and maintenance include both reimbursable and non-reimbursable property expenses. The increase in property operating expenses of $7.6 million during the year ended December 31, 2021 as compared to the same period in 2020 was primarily attributable to the increase in our portfolio size. 35 General and Administrative Expenses General and administrative expenses increased $1.8 million during the year ended December 31, 2021 as compared to the same period in 2020, which was primarily due to actual costs recorded during the last two months of 2021 following the Distribution and the Company’s commencement of operations as a standalone business, as compared with an allocation of amounts for 2020 and the first ten months of 2021. General and administrative expenses for Realty Income Office Assets for the ten months of 2021 and the full year 2020 are primarily an allocation from Realty Income general and administrative expenses, and therefore, do not reflect the full general and administrative expenses of an independent, separate public company. Depreciation and Amortization Expenses The increase in depreciation and amortization expenses of $18.0 million during the year ended December 31, 2021 as compared to the same period in 2020 was primarily due to the increase in our portfolio size. Impairments Impairments of $49.9 million and $18.7 million were recorded during the years ended December 31, 2021 and 2020, respectively. As part of the consummation of the Distribution, the Company’s portfolio became subject to new management which identified certain non-core assets for potential sale. Based on management’s estimates, the carrying value of certain assets was determined to be unrecoverable, resulting in the recognition of impairment losses during the period following the Distribution. Other (Expense) Income and Provision for Income Taxes The table below sets forth, for the periods presented, certain financial information and the dollar amount change year over year (in thousands): Year Ended December 31, 2021 2020 2021 vs 2020 Increase/(Decrease) Interest expense $ (4,267) $ (2,931) $ 1,336 Loss on extinguishment of debt, net $ (3,782) $ — $ 3,782 Equity in income of unconsolidated joint venture $ (56) $ — $ 56 Provision for income taxes $ (157) $ — $ 157 Interest Expense The increase in interest expense of $1.3 million during the year ended December 31, 2021 as compared to the same period in 2020 was primarily due to an increase in debt outstanding from $37.1 million as December 31, 2020 to $616.8 million as of December 31, 2021 in connection with the capitalization of the Company in connection with the Separation and the Distribution, as discussed in Note 6 – Debt, Net. Loss on extinguishment of debt, net Loss on extinguishment of debt, net increased $3.8 million during the year ended December 31, 2021 as compared to no loss on extinguishment of debt in the same period in 2020. The loss is the result of early extinguishment of Realty Income’s mortgage debt prior to the consummation of the Mergers on the properties contributed to the Company. Equity in income of unconsolidated joint venture Equity in income of the unconsolidated joint venture of $0.1 million during the year ended December 31, 2021 as compared to no equity in income of the unconsolidated joint venture for the same period in 2020 relates to the Company’s investment in one unconsolidated joint venture, which interest was transferred to the Company in connection with the Separation and Distribution. Provision for Income Taxes The provision for income taxes consists of certain state and local income and franchise taxes. The increase to $0.2 million during the year ended December 31, 2021, as compared to no provision for income taxes prior to the time the Company became an independent, separate public company. 36 Comparison of the year ended December 31, 2020 to the year ended December 31, 2019 (dollars in thousands) Revenues The table below sets forth, for the periods presented, revenue information and the dollar amount change year over year (in thousands): Year Ended December 31, 2020 2019 2020 vs 2019 Increase/(Decrease) Revenues: Rental $ 53,474 $ 53,465 $ 9 Rental Rental revenue (including reimbursable) remained constant at $53.5 million during both of the years ended December 31, 2020 and December 31, 2019. There were no acquisitions or dispositions in the years ended December 31, 2020 and December 31, 2019, which led to stable rental revenues during these periods. Operating Expenses The table below sets forth, for the periods presented, certain operating expense information and the dollar amount change year over year (in thousands): Year Ended December 31, 2020 2019 2020 vs 2019 Increase/(Decrease) Property operating 5,770 5,898 (128) General and administrative 2,051 2,044 7 Depreciation and amortization 25,950 26,923 (973) Impairments 18,671 — 18,671 Total operating expenses $ 52,442 $ 34,865 $ 17,577 Property Operating Expenses Property (including reimbursable) expenses decreased $0.1 million during the year ended December 31, 2020, compared to the year ended December 31, 2019. General and Administrative Expenses General and administrative expenses remained constant at $2.0 million during both of the years ended December 31, 2020 and December 31, 2019. General and administrative expenses for Realty Income Office Assets are primarily an allocation from Realty Income general and administrative expenses. Depreciation and Amortization Expenses Depreciation and amortization expense decreased $1.0 million for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to a $0.8 million decrease in amortization expense of in-place leases as a result of certain assets reaching the end of their lease term during 2020, and a $0.2 million decrease in depreciation expense associated with an office property impairment (discussed below), resulting in a lower cost basis for depreciation. Impairments During the year ended December 31, 2020, Realty Income Office Assets recorded a $18.7 million pre-tax non-cash impairment loss related to one office property that was triggered by a near term lease expiration, combined with a mortgage loan maturity. Realty Income Office Assets did not record any impairment losses on properties during the year ended December 31, 2019. 37 Other (Expense) Income The table below sets forth, for the periods presented, certain financial information and the dollar amount change year over year (in thousands): Year Ended December 31, 2020 2019 2020 vs 2019 Increase/(Decrease) Interest expense (2,931) (3,316) (385) Interest Expense Interest expense decreased $0.4 million for the year ended December 31, 2020 compared to the year ended December 31, 2019. This decrease is primarily attributable to Realty Income repaying three mortgages in full for $31.8 million during the second half of the year ended December 31, 2020, on behalf of Realty Income Office Assets, reducing the mortgage payable balance at December 31, 2020 by $33.1 million as compared to December 31, 2019. Non-GAAP Measures Our results are presented in accordance with U.S. GAAP. We also disclose certain non-GAAP measures, as discussed further below. M anagement uses these non-GAAP financial measures in our internal analysis of results and believes these measures are useful to investors for the reasons explained below. These non-GAAP financial measures should not be considered as substitutes for any measures derived in accordance with U.S. GAAP. Funds From Operations (“FFO”) and Core Funds from Operations (“Core FFO”) Attributable to Orion Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts, Inc. (“Nareit”), an industry trade group, has promulgated a supplemental performance measure known as funds from operations (“FFO”), which we believe to be an appropriate supplemental performance measure to reflect the operating performance of a REIT. FFO is not equivalent to our net income or loss as determined under U.S. GAAP. Nareit defines FFO as net income or loss computed in accordance with U.S. GAAP adjusted for gains or losses from disposition of real estate assets, depreciation and amortization of real estate assets, impairment write-downs on real estate, and our pro rata share of FFO adjustments related to the Unconsolidated Joint Venture. We calculate FFO in accordance with Nareit’s definition described above. In addition to FFO, we use Core FFO as a non-GAAP supplemental financial performance measure to evaluate the operating performance of the Company. Core FFO, as defined by the Company, excludes from FFO non-recurring or infrequent items such as acquisition-related expenses, transaction costs and gains or losses on extinguishment of swaps and/or debt. We believe that FFO and Core FFO allow for a comparison of the performance of our operations with other publicly-traded REITs, as FFO and Core FFO, or equivalent measures, are routinely reported by publicly-traded REITs, each adjust for items that we believe do not reflect the ongoing operating performance of our business and we believe are often used by analysts and investors for comparison purposes. For all of these reasons, we believe FFO and Core FFO, in addition to net income (loss), as defined by U.S. GAAP, are helpful supplemental performance measures and useful in understanding the various ways in which our management evaluates the performance of the Company over time. However, not all REITs calculate FFO and Core FFO the same way, so comparisons with other REITs may not be meaningful. FFO and Core FFO should not be considered as alternatives to net income (loss) and are not intended to be used as a liquidity measure indicative of cash flow available to fund our cash needs. Neither the SEC, Nareit, nor any other regulatory body has evaluated the acceptability of the exclusions used to adjust FFO in order to calculate Core FFO and its use as a non-GAAP financial performance measure. 38 The table below presents a reconciliation of FFO and Core FFO to net (loss) income attributable to common stockholders, the closest GAAP financial measure, for the years ended December 31, 2021 and 2020 (dollars in thousands): Year Ended December 31, 2021 2020 Net (loss) income attributable to common stockholders $ (47,481) $ (1,899) Depreciation and amortization of real estate assets 43,914 25,950 Impairment of real estate 49,859 18,671 Proportionate share of adjustments for unconsolidated entity 397 — FFO attributable to common stockholders $ 46,689 $ 42,722 Transaction costs (1) 7,909 — Loss (gain) on extinguishment and forgiveness of debt, net 3,782 — Core FFO attributable to common stockholders $ 58,380 $ 42,722 (1) Transaction costs primarily consist of integration costs and attorney fees and accountant fees related to the Mergers and the Distribution. Integration costs consist of expenses related to the fair value of the warrants issued to affiliates of the Arch Street Partner as well as appraisal fees. Liquidity and Capital Resources General Our principal liquidity needs for the next twelve months are to: (i) fund operating expenses; (ii) meet our debt service requirements; (iii) make distributions to our stockholders, as required for us to qualify as a REIT; (iv) fund capital expenditures at properties we own; and (v) fund new acquisitions, including acquisitions related to the Arch Street Joint Venture. We expect that our principal sources of short-term liquidity, which are our cash and cash equivalents on hand, cash flows from operations, and borrowings under the Revolving Facility, are sufficient to meet our liquidity needs for the next twelve months. As of December 31, 2021, we had $29.3 million of cash and cash equivalents and $335.0 million of borrowing capacity under the Revolving Facility. Our principal liquidity needs beyond the next twelve months are to: (i) repay or refinance debt at maturity, (ii) fund capital expenditures at properties we own and (iii) fund new acquisitions. We generally believe we will be able to satisfy these liquidity needs by a combination of cash flows from operations, borrowings under the Revolving Facility, proceeds from real estate dispositions, new borrowings such as bank term loans or other secured or unsecured debt, issuances of equity securities, and/or proceeds from the sale of assets. We believe we will be successful in either repaying or refinancing our debt obligations at or prior to maturity, but we cannot provide any assurance we will be able to do so. Our ability to refinance debt, raise capital and/or sell assets will be affected by various factors existing at the relevant time, such as capital and credit market conditions, the state of the national and regional economies, commercial real estate market conditions, available interest rate levels, the lease terms for and equity in and value of any related collateral, our financial condition and the operating history of the collateral, if any. Credit Agreements Summary and Obligations In connection with the Separation and the Distribution, on November 12, 2021, we, as parent, and Orion Office REIT LP (“Orion OP”), as borrower, entered into (i) a credit agreement (the “Revolver/Term Loan Credit Agreement”) providing for a three-year, $425.0 million Revolving Facility, including a $25.0 million letter of credit sub-facility, and a two-year, $175.0 million Term Loan Facility with Wells Fargo Bank, National Association, as administrative agent, and the lenders and issuing banks party thereto and (ii) a credit agreement (the “Bridge Credit Agreement,” and together with the Revolver/Term Loan Credit Agreement, the “Credit Agreements”) providing for a 6-month, $355.0 million senior bridge term loan facility (the “Bridge Facility,” and together with the Revolver/Term Loan Facilities, the “Facilities”) with Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto. On November 12, 2021, Orion OP borrowed $90.0 million under the Revolving Facility, and each of the Term Loan Facility and the Bridge Facility was fully drawn. Approximately $595.0 million of the net proceeds of the Facilities was distributed to Realty Income in accordance with the Separation and Distribution Agreement. Orion OP retained the remaining net proceeds of such borrowings as working capital that will be used for our general corporate purposes, Orion OP and Orion OP’s subsidiaries. 39 As of December 31, 2021, the Company had approximately $620.0 million of total consolidated debt outstanding, consisting of a $355.0 million Bridge Facility, a $175.0 million Term Loan Facility and a $425.0 million Revolving Facility, $90.0 million of which was outstanding. In addition, the Company’s pro rata share of the mortgage notes of the unconsolidated joint venture was $27.3 million as of December 31, 2021. The Bridge Facility is subject to one 6-month extension option at the election of Orion OP. The exercise of such extension option requires the payment of an extension fee and the satisfaction of certain other customary conditions. The Bridge Facility was refinanced with a $355.0 million mortgage loan during February 2022 (see “CMBS Loan” below). The interest rate applicable to the loans under the Revolver/Term Loan Facilities may, at the election of Orion OP, be determined on the basis of LIBOR or a base rate, in either case, plus an applicable margin. Under the Revolver/Term Loan Facilities, the applicable margin is (1) in the case of the Revolving Facility, 2.50% for LIBOR loans and 1.50% for base rate loans and (2) in the case of the Term Loan Facility, 2.50% for LIBOR loans and 1.50% for base rate loans. Loans under the Revolver/Term Loan Facilities may be prepaid, and unused commitments under the Revolver/Term Loan Facilities may be reduced, at any time, in whole or in part, without premium or penalty (except for LIBOR breakage costs). To the extent that amounts under the Revolving Facility remain unused, Orion OP is required to pay a quarterly commitment fee on the unused portion of the Revolving Facility in an amount equal to 0.25% per annum of the unused portion of the Revolving Facility. The Revolver/Term Loan Facilities are guaranteed pursuant to a Guaranty (the “Revolver/Term Loan Guaranty”) by us and, subject to certain exceptions, substantially all of Orion OP’s existing and future subsidiaries (including substantially all of its subsidiaries that directly or indirectly own unencumbered real properties), other than certain joint ventures and subsidiaries that own real properties subject to certain other indebtedness (such subsidiaries of Orion OP, the “Subsidiary Guarantors”). The Revolver/Term Loan Facilities are secured by, among other things, first priority pledges of the equity interests in the Subsidiary Guarantors. Revolver/Term Loan Facility Covenants The Revolver/Term Loan Facilities require that Orion OP comply with various covenants, including, without limitation, covenants restricting, subject to certain exceptions, liens, investments, mergers, asset sales and the payment of certain dividends. In addition, the Revolver/Term Loan Facilities require that Orion OP satisfy certain financial covenants. The following is a summary of key financial covenants for the Company’s Revolver/Term Loan Facilities and the Company’s compliance therewith, as calculated per the terms of the Revolver/Term Loan Credit Agreement: Credit Facility Key Covenants Required December 31, 2021 Ratio of total indebtedness to total asset value ≤ 60% 30.8% Ratio of adjusted EBITDA to fixed charges ≥ 1.5x 10.07x Ratio of secured indebtedness to total asset value ≤ 45% 1.3% Ratio of unsecured indebtedness to unencumbered asset value ≤ 60% 30.5% Ratio of unencumbered adjusted NOI to unsecured interest expense ≥ 2.00x 16.55x As of December 31, 2021, Orion OP was in compliance with these financial covenants, and Orion anticipates maintaining compliance for the foreseeable future. The Revolver/Term Loan Facilities include customary representations and warranties of us and Orion OP, which must be true and correct in all material respects as a condition to future extensions of credit under the Revolver/Term Loan Facilities. The Revolver/Term Loan Facilities also include customary events of default, the occurrence of which, following any applicable grace period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations of Orion OP under the Revolver/Term Loan Facilities to be immediately due and payable and foreclose on the collateral securing the Revolver/Term Loan Facilities. CMBS Loan On February 10, 2022, certain indirect subsidiaries of the Company (the “Mortgage Borrowers”) obtained a $355.0 million fixed rate mortgage loan (the “CMBS Loan”) from Wells Fargo Bank, National Association (the “Lender”), which is secured by the Mortgage Borrowers’ fee simple or ground lease interests in 19 properties owned indirectly by the Company (collectively, 40 the “Mortgaged Properties”). The CMBS Loan bears interest a fixed rate of 4.971% per annum and matures on February 11, 2027. The CMBS Loan requires monthly payments of interest only and all principal is due at maturity. The proceeds of the CMBS Loan were used to repay the Bridge Facility. Upon closing of the CMBS Loan, the Mortgage Borrowers funded $35.5 million of loan reserves primarily for future rent concessions and tenant improvement allowances under the leases with respect to the 19 Mortgaged Properties. These amounts, as well as the transaction expenses incurred in connection with the CMBS Loan, were funded with cash on hand and borrowings under the Company’s Revolving Facility. The CMBS Loan is secured by, among other things, first priority mortgages and deeds of trust granted by the Mortgage Borrowers and encumbering the Mortgaged Properties. The CMBS Loan is generally not freely prepayable by the Mortgage Borrowers without payment of certain prepayment premiums and costs. The CMBS Loan may be prepaid in whole, but not in part, except as provided in the CMBS Loan agreement, at any time following the Prepayment Lockout Release Date (as defined in the CMBS Loan agreement) (generally two years after the Loan has been fully securitized), subject to the payment of a yield maintenance premium and the satisfaction of other terms and conditions set forth in the CMBS Loan agreement. Further, releases of individual properties are permitted in connection with an arms’ length third party sale upon repayment of the Release Price (as defined in the CMBS Loan agreement) for the applicable individual property and subject to payment of the applicable yield maintenance premium and the satisfaction of other terms and conditions set forth in the CMBS Loan agreement. The CMBS Loan agreement also contains customary cash management provisions, including certain trigger events (such as failure of the Mortgage Borrowers to satisfy a minimum debt yield) which allow the Lender to retain any excess cash flow as additional collateral for the Loan, until such trigger event is cured. In connection with the CMBS Loan agreement, the Company (as the guarantor) delivered a customary non-recourse carveout guaranty to the Lender (the “Guaranty”), under which the Company guaranteed the obligations and liabilities of the Mortgage Borrowers to the Lender with respect to certain non-recourse carveout events and the circumstances under which the CMBS Loan will be fully recourse to the Mortgage Borrowers, and which includes requirements for the Company to maintain a net worth of no less than $355.0 million and liquid assets of no less than $10.0 million, in each case, exclusive of the values of the collateral for the CMBS Loan. The Mortgage Borrowers and the Company also provided a customary environmental indemnity agreement, pursuant to which the Mortgage Borrowers and the Company agreed to protect, defend, indemnify, release and hold harmless the Lender from and against certain environmental liabilities relating to the Mortgaged Properties. The loan documents evidencing the CMBS Loan include customary representations, warranties and covenants of the Mortgage Borrowers and the Company. The loan documents also include customary events of default, the occurrence of which, following any applicable grace period, would permit the Lender to, among other things, declare the principal, accrued interest and other obligations of the Mortgage Borrowers under the loan documents to be immediately due and payable and foreclose on the Mortgaged Properties. Equity On November 10, 2021, we issued 56,525,650 additional shares of our common stock to Realty Income, such that Realty Income owned 56,625,650 shares of our common stock. Also on November 10, 2021, in connection with the filing of our Articles of Amendment, we changed the par value of our common stock from $0.01 per share to $0.001 per share. On November 12, 2021, Realty Income effected the Distribution. On November 12, 2021, in connection with the Distribution, Orion OP entered into the Arch Street Joint Venture with the Arch Street Partner, an affiliate of Arch Street Capital Partners, pursuant to which the Arch Street Partner consented to the transfer of the equity interests of the Arch Street Joint Venture previously held by VEREIT Real Estate, L.P. to Orion OP. Also on November 12, 2021, in connection with the entry into the LLCA, we granted certain affiliates of the Arch Street Partner warrants to purchase up to 1,120,000 shares of our common stock (the “Arch Street Warrants”). The Arch Street Warrants entitle the respective holders to purchase shares of our common stock at a price per share equal to $22.42, at any time. The Arch Street Warrants may be exercised, in whole or in part, through a cashless exercise, in which case the holder would receive upon such exercise the net number of shares of our common stock determined according to the formula set forth in the Arch Street Warrants. The Arch Street Warrants expire on the earlier of (a) ten years after issuance and (b) if the Arch Street Joint Venture is terminated, the later of the termination of the Arch Street Joint Venture and seven years after issuance. 41 We have agreed that, prior to six months following our eligibility to use Form S-3 for the registration of our securities, we will file with the SEC a registration statement on Form S-3 (the “Registration Statement”) for the registration, under the Securities Act, of the shares of our common stock issuable upon exercise of the Arch Street Warrants. We will use our commercially reasonable efforts to cause the Registration Statement to become effective and to maintain the effectiveness of the Registration Statement, and a current prospectus relating thereto, until the earlier of (a) the expiration of the Arch Street Warrants, or (b) the shares issuable upon such exercise become freely tradable under United States federal securities laws by anyone who is not an affiliate (as such term is defined in Rule 144 under the Securities Act (or any successor rule)) of us. The holders of the Arch Street Warrants will also remain subject to the ownership limitations pursuant to our organizational documents. Also in connection with the entry into the LLCA, the Arch Street Joint Venture’s lender consented to the transfer of the interests of the Arch Street Joint Venture previously held by VEREIT Real Estate, L.P. to Orion OP, and, in connection therewith, Orion OP agreed to become a guarantor of certain limited customary recourse obligations and provide certain customary environmental indemnities under the Arch Street Joint Venture’s existing indebtedness. Derivatives and Hedging Activities During the year ended December 31, 2021, the Company entered into interest rate swap agreements with an aggregate notional amount of $175.0 million, effective on December 1, 2021 and maturing on November 12, 2023, which were designated as cash flow hedges, in order to hedge interest rate volatility with respect to the Company’s borrowings under the Term Loan Facility. Right of First Offer Agreement In connection with the entry into the LLCA, we and the Arch Street Joint Venture entered into that certain Right of First Offer Agreement (the “ROFO Agreement”), dated November 12, 2021, pursuant to which, subject to certain limitations, we, on behalf of ourselves and our affiliates, agreed not to acquire or purchase a fee simple or ground leasehold interest in any office real property, including by way of an acquisition of equity interests, within certain investing parameters without first offering the property for purchase to the Arch Street Joint Venture, which will expire upon the earlier of (1) the third anniversary of the execution of the ROFO Agreement, (2) the date on which the Arch Street Joint Venture is terminated or (3) the date on which the Arch Street Joint Venture’s gross book value of assets is below $50.0 million. If the Arch Street Joint Venture decides not to acquire any such property, we may seek to acquire the property independently, subject to certain restrictions. We do not anticipate that the ROFO Agreement will have a material impact on our ability to acquire additional office real properties, although it could result in us acquiring future properties through the Arch Street Joint Venture rather than as sole 100% owner. Dividend We are a newly formed company that has recently commenced operations, and as a result, we have not paid any dividends as of December 31, 2021. We intend to qualify and elect to be taxed as a REIT for U.S. federal income tax purposes beginning with our taxable year commencing on the day prior to the Distribution and ending on December 31, 2021. We intend to make regular distributions to our stockholders to satisfy the requirements to qualify as a REIT. On March 22, 2022, the Company’s Board of Directors declared a quarterly dividend of $0.10 per share for the first quarter of 2022 payable on April 15, 2022, to stockholders of record as of March 31, 2022. Our dividends may be funded from a variety of sources. In particular, we expect that, initially, our dividends will exceed our net income under GAAP because of non-cash expenses, mainly depreciation and amortization expense, which are included in net income. To the extent that our funds available for distribution are less than the amount we must distribute to our stockholders to satisfy the requirements to qualify as a REIT, we may consider various means to cover any such shortfall, including borrowing under our Revolving Facility or other loans, selling certain of our assets or using a portion of the net proceeds we receive from future offerings of equity, equity-related securities or debt securities or declaring taxable share dividends. In addition, our Articles of Amendment and Restatement allow us to issue shares of preferred equity that could have a preference on dividends, and if we do, the dividend preference on the preferred equity could limit our ability to pay dividends to the holders of our common stock. 42 Contractual Obligations The following is a summary of our contractual obligations as of December 31, 2021 (in thousands): Payments due by period Total Less than 1 year 1-3 years 4-5 years More than 5 years Principal payments - Bridge Facility (1) $ 355,000 $ 355,000 $ — $ — $ — Interest payments - Bridge Facility (2) 3,538 3,538 — — — Principal payments - Credit facility term loan 175,000 — 175,000 — — Interest payments - Credit facility term loan (3) 10,554 5,668 4,886 — — Principal payments - credit facility revolver 90,000 — 90,000 — — Interest payments - credit facility revolver (2) 10,061 2,938 7,123 — — Operating and ground lease commitments 16,505 1,008 1,672 442 13,383 Total $ 660,658 $ 368,152 $ 278,681 $ 442 $ 13,383 ____________________________________ (1) The Bridge Facility was refinanced with a $355.0 million mortgage loan during February 2022. (2) Interest payments due in future periods on variable rate debt were calculated using a forward LIBOR curve. (3) As of December 31, 2021, we had $175.0 million of variable rate debt on the Credit Facility Term Loan effectively fixed through the use of interest rate swap agreements. We used the interest rates effectively fixed under our swap agreements to calculate the debt payment obligations in future periods. As part of its ordinary re-leasing activities, the Company has agreed and anticipates that it will continue to agree to provide rent concessions to tenants and incur leasing costs with respect to its properties, including tenant improvement allowances, landlord agreements to pay for certain improvements, as well as leasing commissions. These rent concession and leasing cost commitments could be significant. For example, during November 2021, in connection with the 11-year extension of Merrill Lynch, Pierce, Fenner & Smith Incorporated at the Company’s largest property measured by annualized base rent, the Company agreed to $11.1 million of future rent concessions and to fund up to $22.9 million of tenant improvement allowances, the full amount of which was funded as loan reserves as part of the closing of the CMBS Loan in February 2022. Cash Flow Analysis for the year ended December 31, 2021 The following table summarizes the changes in cash flows for the year ended December 31, 2021 and 2020 (dollars in millions): Year Ended December 31, 2021 versus 2020 2021 2020 Net cash provided by operating activities $ 56,108 $ 42,327 $ 13,781 Net cash used in investing activities $ (12,261) $ (464) $ (11,797) Net cash used in financing activities $ (18,444) $ (41,667) $ 23,223 Net cash provided by operating activities increased $13.8 million during the year ended December 31, 2021, compared to the year ended December 31, 2020 primarily due to the increase in our portfolio size. At December 31, 2021, we had 92 office properties with an aggregate of 10.5 million square feet as compared to 40 properties with approximately 3.0 million leasable square feet at December 31, 2020. Net cash used in investing activities increased $11.8 million during the year ended December 31, 2021, compared to the year ended December 31, 2020. The change was primarily due to an increase in capital expenditures and leasing costs associated with lease renewals, as well as an additional investment of $2.5 million in the Company’s unconsolidated joint venture during the year ended December 31, 2021. Amounts for the 2021 period include $9.0 million of leasing commissions paid in connection with the early extension of the Company’s lease with Merrill Lynch, Pierce, Fenner & Smith Incorporated at a property in Hopewell, New Jersey. Net cash used in financing activities decreased $23.2 million during the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to the aggregate proceeds of $620.0 million from the Facilities, offset by an increase of $578.2 million in net distributions to parent, including approximately $595.0 million distributed to Realty Income related to the Separation and Distribution. 43 VEREIT OFFICE ASSETS Critical Accounting Policies Real Estate Investments VEREIT management performed quarterly impairment review procedures, primarily through continuous monitoring of events and changes in circumstances that could indicate the carrying value of its real estate assets may not be recoverable. Impairment indicators that VEREIT management considered included, but were not limited to, decrease in operating income, bankruptcy or other credit concerns of a property’s major tenant or tenants or a significant decrease in a property’s revenues due to lease terminations, vacancies or reduced lease rates. When impairment indicators are identified or if a property is considered to have a more likely than not probability of being disposed of within the next 12 to 24 months, VEREIT management assessed the recoverability of the assets by determining whether the carrying value of the assets will be recovered through the undiscounted future cash flows expected from the use of the assets and their eventual disposition. GAAP required VEREIT Office Assets to utilize the expected holding period of its properties when assessing recoverability. In the event that such expected undiscounted future cash flows did not exceed the carrying value, the real estate assets have been adjusted to their respective fair values and an impairment loss has been recognized. There are inherent uncertainties in making estimates of expected future cash flows such as market conditions and performance and sustainability of the tenants. Goodwill Impairment VEREIT evaluated goodwill for impairment annually or more frequently when an event occurred or circumstances changed that indicated the carrying value may not be recoverable. To determine whether it was necessary to perform a quantitative goodwill impairment test, VEREIT first assessed qualitative factors, including, but not limited to macro-economic conditions such as deterioration in the entity’s operating environment or industry or market considerations; entity-specific events such as increasing costs, declining financial performance, or loss of key personnel; or other events such as an expectation that a reporting unit will be sold or sustained decrease in VEREIT’s stock price on either an absolute basis or relative to peers. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not (i.e. greater than 50% chance) that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no quantitative testing is required. If it is determined, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value is less than the carrying amount, the provisions of guidance require that the fair value be compared to the carrying value. Goodwill is considered impaired if the carrying value exceeds the fair value. No impairments of VEREIT’s goodwill were recorded during the ten months ended October 31, 2021 and year ended December 31, 2020 and 2019. The results of the VEREIT impairment tests carry over to VEREIT Office Assets, therefore no impairments were recorded in the accompanying statements of operations. Recent Accounting Pronouncements Accounting guidance that VEREIT Office Assets has recently adopted, as well as accounting guidance that has been recently issued but not yet adopted, is included in Note 1 — Organization and Summary of Significant Accounting Policies of the annual combined and consolidated financial statements of VEREIT Office Assets, included elsewhere in this Annual Report on Form 10-K. 44 Results of Operations Comparison of the period from January 1, 2021 to October 31, 2021 (the date immediately prior to the closing date of the Mergers (the “2021 period”) to the year ended December 31, 2020 (the “2020 period”)) (dollars in thousands) Operations for certain office real properties and related assets previously owned by subsidiaries of VEREIT (collectively, “VEREIT Office Assets”) ended on October 31, 2021 (the date immediately prior to the closing date of the Mergers). The VEREIT Office Assets were owned for all of 2020 resulting in a decrease in revenues and expenses between the periods due to the 2021 period having only 304 days of activity. Ten Months Ended October 31, 2021 Year Ended December 31, 2020 Increase / (Decrease) REVENUE Rental revenue $ 134,740 $ 170,304 $ (35,564) Fee income from unconsolidated joint venture 654 596 58 Total revenues 135,394 170,900 (35,506) EXPENSES Property operating 36,173 46,597 (10,424) General and administrative 5,602 7,029 (1,427) Depreciation and amortization 48,938 62,662 (13,724) Impairments 28,064 9,306 18,758 Total operating expenses 118,777 125,594 (6,817) Other (expenses) income: Other income, net 152 158 (6) Interest expense (5,961) (9,905) (3,944) Gain on disposition of real estate sales, net — 9,765 (9,765) Loss on extinguishment of debt, net (5,294) (1,686) 3,608 Equity in income of unconsolidated joint venture 697 535 162 Total other expenses, net (10,406) (1,133) 9,273 Income before taxes 6,211 44,173 (37,962) Provision for income taxes (520) (640) (120) Net income $ 5,691 $ 43,533 $ (37,842) Rental Revenue . Rental revenue decreased $35.6 million primarily due to having only 304 days of activity in the 2021 period as compared to a full year in the 2020 period. Additionally, rental revenue decreased approximately $4.2 million due to the disposition of three properties that were sold to the unconsolidated joint venture during 2020 and a decrease of approximately $3.5 million due to vacancies. Fee Income from Unconsolidated Joint Venture . Fee income from the unconsolidated joint venture increased $0.1 million primarily due to additional acquisition and property management fees earned during the 2021 period offset by a decrease due to having only 304 days of activity in the 2021 period as compared to a full year in the 2020 period. Property Operating Expenses . Property operating expenses decreased $10.4 million primarily due to having only 304 days of activity in the 2021 period as compared to a full year in the 2020 period. Additionally, property operating expenses decreased approximately $1.2 million due to the disposition of three properties that were sold to the unconsolidated joint venture during 2020. General and Administrative Expenses . General and administrative expenses decreased $1.4 million primarily due to having only 304 days of activity in the 2021 period as compared to a full year in the 2020 period. General and administrative expenses for VEREIT Office Assets are an allocation from overall VEREIT general and administrative expenses. 45 Depreciation and Amortization Expense . Depreciation and amortization expense decreased $13.7 million primarily due to having only 304 days of activity in the 2021 period as compared to a full year in the 2020 period. Additionally, depreciation and amortization expense decreased $1.2 million due to the write-off of an intangible asset related to an early lease termination and $0.7 million due to the disposition of three properties that were sold to the unconsolidated joint venture during 2020. Impairments . Impairments increased $18.8 million between the 2020 period and the 2021 period. As part of VEREIT Office Assets’ impairment review procedures, net real estate assets representing four properties were deemed to be impaired, resulting in impairment charges of $28.1 million during the 2021 period. Net real estate assets related to two properties were deemed to be impaired, resulting in impairment charges of $9.3 million during the 2020 period. The 2021 and 2020 impairments related to properties that management identified for potential sale or determined, based on discussions at the time with the existing tenants, would not be released by the tenant and management believed that the property would not be leased to another tenant at a rental rate that supports the current book value. Interest Expense. Interest expense decreased $3.9 million primarily due to the early repayment of mortgage notes payable on properties in connection with the consummation of the Mergers and due to having only 304 days of activity in the 2021 period as compared to a full year in the 2020 period. Gain on Disposition of Real Estate Assets, Net . Gain on disposition of real estate assets, net was $9.8 million for the 2020 period, which was related to the three properties sold to the unconsolidated joint venture during the year ended December 31, 2020 for an aggregate gross sales price of $135.5 million. No such gain was recorded during the 2021 period. Loss on Extinguishment of Debt, Net. Loss on extinguishment of debt, net was $5.3 million and $1.7 million in the 2021 and 2020 periods, respectively, due to the early extinguishment of mortgage notes payable. Equity in Income of Unconsolidated Joint Venture . Equity in income of unconsolidated joint venture increased $0.2 million primarily due to three properties acquired by the unconsolidated joint venture in 2020. Other Income, Net . Other income, net remained constant between the 2020 period and 2021 period. Provision for Income Taxes . Provision for income taxes decreased $0.1 million primarily due to having only 304 days of activity in the 2021 period as compared to a full year in the 2020 period. Net Income . Net income was $5.7 million and $43.5 million for the 2021 period and 2020 period, respectively, for a decrease of $37.8 million. 46 Comparison of the year ended December 31, 2020 to the year ended December 31, 2019 (dollars in thousands) Year Ended December 31, 2020 2019 Increase / (Decrease) REVENUE Rental revenue $ 170,304 $ 182,069 $ (11,765) Fee income from unconsolidated joint venture 596 — 596 Total revenues 170,900 182,069 (11,169) EXPENSES Property operating 46,597 47,248 (651) General and administrative 7,029 7,800 (771) Depreciation and amortization 62,662 70,859 (8,197) Impairments 9,306 3,511 5,795 Total operating expenses 125,594 129,418 (3,824) Other (expenses) income: Other income, net 158 549 (391) Interest expense (9,905) (12,056) (2,151) Gain on disposition of real estate assets, net 9,765 — 9,765 Loss on extinguishment of debt, net (1,686) (40) 1,646 Equity in income of unconsolidated joint venture 535 — 535 Total other expenses, net (1,133) (11,547) (10,414) Income before taxes 44,173 41,104 3,069 Provision for income taxes (640) (517) 123 Net income $ 43,533 $ 40,587 $ 2,946 Rental Revenue . Rental revenue decreased $11.8 million for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to the disposition of three properties that were sold to the unconsolidated joint venture during the year ended December 31, 2020. Fee Income from Unconsolidated Joint Venture . Fee income from the unconsolidated joint venture was $0.6 million for the year ended December 31, 2020. No such income was recorded during the year ended December 31, 2019. VEREIT Office Assets provides various services to the unconsolidated joint venture, which were performed during the year ended December 31, 2020, in exchange for fees. Property Operating Expenses . Property operating expenses decreased $0.7 million for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to the disposition of three properties that were sold to the unconsolidated joint venture during the year ended December 31, 2020. General and Administrative Expenses . General and administrative expenses decreased $0.8 million for the year ended December 31, 2020 compared to the year ended December 31, 2019. General and administrative expenses for VEREIT Office Assets are an allocation from overall VEREIT general and administrative expenses. The decrease is primarily due to the disposition of three properties that were sold to the unconsolidated joint venture during the year ended December 31, 2020. Depreciation and Amortization Expense . Depreciation and amortization expense decreased $8.2 million for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to the disposition of three properties that were sold to the unconsolidated joint venture during the year ended December 31, 2020. 47 Impairments . Impairments increased $5.8 million for the year ended December 31, 2020 compared to the year ended December 31, 2019. As part of VEREIT Office Assets’ impairment review procedures, net real estate assets representing two properties were deemed to be impaired, resulting in impairment charges of $9.3 million during the year ended December 31, 2020. During the year ended December 31, 2019, net real estate assets related to two properties were deemed to be impaired, resulting in impairment charges of $3.5 million. The 2020 and 2019 impairments related to properties that management identified for potential sale or determined, based on discussions at the time with the existing tenants, would not be released by the tenant and management believed that the property would not be leased to another tenant at a rental rate that supported the book value. Interest Expense. Interest expense decreased $2.2 million for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to the early payoff of $75.7 million of mortgage notes payable and principal payments of $3.8 million subsequent to January 1, 2019. Gain on Disposition of Real Estate Assets, Net . Gain on disposition of real estate assets, net was $9.8 million for the year ended December 31, 2020, which was related to the three properties sold to the unconsolidated joint venture during the year ended December 31, 2020 for an aggregate gross sales price of $135.5 million. No such gain was recorded during the year ended December 31, 2019. Loss on Extinguishment of Debt, Net. Loss on extinguishment of debt, net was $1.7 million for the year ended December 31, 2020 which was related to losses on the early extinguishment of a mortgage note payable. No significant losses were recorded during the year ended December 31, 2019. Equity in Income of Unconsolidated Joint Venture . Equity in income of unconsolidated joint venture was $0.5 million for the year ended December 31, 2020. No such income was recorded during the year ended December 31, 2019, as the unconsolidated joint venture was formed during the year ended December 31, 2020. Other Income, Net . Other income, net decreased $0.4 million for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to property insurance settlement proceeds received during the year ended December 31, 2019, with no comparable proceeds received during the same period in 2020. Provision for Income Taxes . Provision for income taxes increased by $0.1 million during the year ended December 31, 2020 compared to the year ended December 31, 2019. Net Income . Net income was $43.5 million and $40.6 million for the years ended December 31, 2020 and 2019, respectively, an increase of $2.9 million during the year ended December 31, 2020 as compared to the year ended December 31, 2019. 48 Liquidity and Capital Resources Cash Flows The following table summarizes the changes in cash flows for the ten months ended October 31, 2021, the year ended December 31, 2020 and the year ended December 31, 2019 (dollars in millions): Ten Months Ended October 31, Year Ended December 31, 10 months 2021 to 2020 Change 2020 to 2019 Change 2021 2020 2019 Net cash provided by operating activities $ 83.7 $ 108.5 $ 112.6 $ (24.8) $ (4.1) Net cash (used in) provided by investing activities $ (9.2) $ 111.4 $ (17.1) $ (120.6) $ 128.5 Net cash used in financing activities $ (77.9) $ (219.4) $ (94.5) $ 141.5 $ (124.9) Net cash provided by operating activities decreased $24.8 million during the ten months ended October 31, 2021 compared to the year ended December 31, 2020 primarily due to having only 304 days of activity in the 2021 period as compared to a full year in the 2020 period, as well as a decrease in rental income due to the disposition of three properties that were sold to the unconsolidated joint venture during the year ended December 31, 2020. Net cash provided by operating activities decreased $4.1 million during the year ended December 31, 2020 compared to the year ended December 31, 2019 primarily due to the disposition of three properties that were sold to the unconsolidated joint venture during the year ended December 31, 2020. Net cash used in investing activities was $9.2 million during the ten months ended October 31, 2021, as compared to net cash provided by investing activities of $111.4 million during the year ended December 31, 2020. The change was primarily due to the three properties sold to the unconsolidated joint venture during year ended December 31, 2020 for proceeds of $116.4 million after closing costs. Net cash provided by investing activities was $111.4 million during the year ended December 31, 2020, as compared to net cash used in investing activities of $17.1 million during the year ended December 31, 2019. The change was primarily due to the three properties sold to the unconsolidated joint venture during year ended December 31, 2020 for proceeds of $116.4 million after closing costs. Net cash used in financing activities decreased $141.5 million during the ten months ended October 31, 2021, compared to the year ended December 31, 2020, primarily due to a decrease of $337.4 million in net distributions to parent, offset by an increase of $194.8 million in the repayment of mortgage notes payable. Net cash used in financing activities decreased $124.9 million during the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to an increase of $150.1 million in net distributions to parent, offset by a decrease of $24.7 million in the repayment of mortgage notes payable. Contractual Obligations VEREIT Office Assets was subject to the following contractual obligations at October 31, 2021 (in thousands). Payments Due by Period Total Less than 1 Year 1 - 3 Years 4 - 5 Years More Than 5 Years Operating lease and ground lease commitments 11,762 55 987 658 10,062 49